AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies
IIPS

RIPSInstitute for International

The Japan Institute ofResearch Institute for

Policy Studies

International Affairs

Peace and Security(Secretariat)

Editor:No. 168

Akio Watanabe

19 December 2012

Editorial Board:JAPAN: A TREASURE TROVE FOR
APPROACHES TO DEALING WITH THE
EUROPEAN CRISIS

Hideki Asari
Masashi Nishihara
Taizo Yakushiji
Online Publisher:
Yoshiji Nogami
President, JIIA

Hajime Takata
The European debt problem and the European
government bond crisis have grown to the point ofundermining the world economy. Given this, how
are European government bonds viewed from aJapanese perspective? It is this author’s opinion
that European government bonds are not purely
national bonds but are instead analogous to local
bonds in Japan, and that therein lays the true
nature of Europe’s problems today.
The views expressed in this piece are the author’s own and should
not be attributed to The Association of Japanese Institutes ofStrategic Studies.

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The Association of Japanese Institutes of Strategic Studies

The author likens European government bonds to “local bonds” because
the countries of Europe do not have the right to issue their own currencies.
Indeed, from a Japanese perspective, European government bonds resemble“local bonds without local tax grants.” In Japan the creditworthiness of local
bonds is supported by a fiscal balance system centered on local tax grants. The
support provided by a scheme centered on local tax grants and numerous
measures such as joint-issued bonds to shore up creditworthiness underlie theextremely high market valuation that Japan’s local bonds still enjoy today.
If Japan did not have local tax grants, then perhaps only Tokyo and otherentities not currently receiving tax grants could rely on enough market
confidence to issue local bonds. This is similar to the way that, with European
government bonds, Germany and the Netherlands have maintained market trust
because of their current-account surpluses, which could be interpreted as themarket adopting an extremely objective view on circumstances in valuing
European bonds today. In Europe’s case, however, there are not enough support
elements to enhance trust in “local bonds without local tax grants” and no legal
insolvency procedures in place for specific bond issues, making it only naturalthat investors ask for high risk premiums when investing.
Japan’s joint-issued bonds were first issued by 27 entities in April 2003
as a new and reliable means of procuring funding for local governments in thewake of investment and loan reform. With the participating entities bearing joint
and several liabilities on a monthly basis, the bonds boast a greater certainty ofredemption. Apart from this joint and several liabilities, a fund has been
established – with each entity depositing part of its debt service funds in acommissioned bank – to enhance liquidity and ensure timely payments. There
are arguments in favor of joint-issue bonds today in Europe as well, and it would
be worth examining efforts that would boost fund-raising capabilities throughjoint-issued bonds for which European governments would bear joint andseveral liabilities within their fiscal schemes.
Revitalization measures for Japan’s local governments were put into
place in the 2000s. Under the Act on Assurance of Sound Financial Status of
Local Governments, local governments facing deteriorating public finances
http://www.jiia.or.jp/en/commentary2

AJISS-Commentary
The Association of Japanese Institutes of Strategic Studies

would be designated “Early Financial Correction Entities” or “Entities underRehabilitation” and mandated to undertake systematic fiscal rehabilitation. Morespecifically, entities for which any of four indicators – real deficit ratio,consolidated real deficit ratio, real public debt expense ratio, and future burden
ratio – are higher than the standards set for early financial correction will berequired to undertake improvement efforts on their own to achieve early financialcorrection. Entities for which any of the three indicators besides “future burdenratio” is higher that the financial rehabilitation standards will be required topursue steady financial rehabilitation with the involvement of the nationalgovernment. Today’s problems with the euro can be attributed to an inadequate
framework of rehabilitation measures such as those above, and Japan’s system
would no doubt serve as a good reference in developing rehabilitation measuresfor Greece and other countries. The problems being faced by Europe due tostarting out with a common currency system lacking an intra-regional
restructuring scheme have become quite apparent.
Europe has already established the European Financial Stabilization
Facility (EFSF), a financial support system that has become the core support for
countries facing debt crises as a vehicle for backing the guarantees of national
governments in the euro zone. The European Stability Mechanism (ESM) has
also been created as a permanent relief mechanism succeeding the EFSF.
Fiscal integration and a fiscal balance system would likely be ideal for
Europe, but time will be needed to develop these schemes. Consequently,support institutions centered on a financial loan system would undoubtedly beessential to provide support in this regard. The Japan Finance Organization for
Municipalities might serve as a useful example in addressing this issue.
Looking back, the disruption in capital markets that followed the burstingof the bubble economy also impacted local finances. Japan’s experiences indealing with local government bonds for more than a decade offer a “treasure
trove for crisis management” in the capital markets. Europe’s financial authorities
would be well-served by studying Japan’s local government bond system.
Hajime Takata is the managing executive officer and chief economist ofMizuho Research Institute Ltd.
http://www.jiia.or.jp/en/commentary3